It all seems to be going wrong for Chinese-American relations when it comes to technology. Late last month Tsinghua University’s purchase of a minority stake in Western Digital was referred to CFUIS, the panel determining if global M&A involves a US national interest. This, contra lots of commentary at the time, wasn’t business as usual, rather the US government drawing a very thick red line around China and saying no nationally significant technology, in this case semiconductor memory, crosses this. And this week the US kicked the feelings of the Chinese People in the goolies by sticking it to ZTE, one of their national tech champions, for selling stuff to supposedly Bad Countries like Iran.
The net effect of this in the near term is bad news for much of the listed semiconductor equity in the US, as a potential purchaser of last resort is removed. Longer term, no-one knows, not even Baruch.
As I’m sure you know, China is definitely an ex-agricultural, industrial economy, but not “post-industrial” like the rest of us. Their unelected government’s legitimacy depends on them getting developed quick, so they want things that can get them there faster, namely technology. Back in the day the best way of getting technology was simply to steal it, to “copy with pride” as the ex-boss of Nokia once put it*.
Chinese companies worked out very early how to make cars that go, sometimes safely, and cellphones you can talk on which only rarely exploded. Things moved fast, thanks to some extremely talented engineering and a bit of borrowing, and soon near-perfect non-exploding copies of the next iPhone were coming out of backrooms in Shenzhen before the handset they were copying came out of Apple’s factories in, er, Shenzhen. Chinese technology has moved on and they now make the best value high spec smartphones around, probably the base station you are using to read this on your mobile (unless you’re in the US), and some interesting looking cars. Wait, is that a Range Rover Sport?!
No, it’s a “Land Wind”. OK the cars are still ripoffs, but never mind, point made.
ZTE, with Huawei, has been one of the big success stories so far, selling the aforementioned base stations, which is why the latest development is I think so significant.
The biggest thing the Chinese are still missing, because it takes ages to build internally, is the real deep know-how that makes technology work. That’s semiconductor manufacturing. The latest 5 year plan has emphasised semiconductor tech as a priority, and earmarked $20 billion do it, but as the great Chinese philosopher Lao Tze put it, “there’s many a slip twixt cup and lip.” A bid by an offshoot of Tsinghua University — the Chinese equivalent of Oxbridge and the Ivy League rolled into one — to buy Micron, the US leader in DRAM (memory chips that make your electronic stuff work faster), failed last year, so the big brains at Tsinghua came up with an alternative: buy an innocuous minority stake at a premium in non-semiconductor hard drive maker Western Digital. Then, and this was a total co-incidence, according to Western Digital’s bosses, Western Digital immediately made a surprise bid for Sandisk, the US leader in NAND Flash memory, using the Chinese cash.
Baruch speculates that ’twas this the CFUIS panel gave hints that they didn’t like. Two weeks ago Tsinghua dropped the purchase of the WD stake. It’s possible that CFUIS didn’t even want Tsinghua to get hold of HDD technology. It’s also possible that without the entry point into Sandisk, Tsinghua was no longer interested. HDDs are a bit boring actually.
The thing is, DRAM and NAND memory is actually super hard to make, and once Chinese companies know how to do this, making other kinds of chip is a lot easier. And absolutely everything has memory in it of one sort or another. I guess the US national interest angle comes from the idea that, in the event of war with China, evil communist code embedded in a hidden recess of the NAND or DRAM in American thermostats and toasters will suddenly make them cease to function, burning the toast and switching off the frigid air-con you people seem to like so much, thereby sapping the morale of the American public. That, and making their incredibly expensive fighter jets plunge into the sea. Don’t laugh, this was in a book Baruch read a couple of years ago about a Sino-American Pacific war (it was a draw in the end).**
How important is this? How seriously do the Chinese take it? To start with, Tsinghua University is an institution that looks pretty flipping important. Take a look at their business school’s Advisory Board membership. With the CEOs of Apple, Exxon, Intel, GM and Wal-mart on it, together with Hank Paulson, Elon Musk and Mark Zuckerberg, it’s almost enough to make Baruch believe in the coming world government conspiracy and give him an inferiority complex — his own alma mater is headed by someone big in supermarkets. The honorary Chairman is ex-Prime Minister Zu Rongji (Tsinghua alumnus). The son of Hu Jintao (another Tsinghua alum) is in charge of Tsinghua Holdings. The current Secretary General Xi Jinping went there. The people currently in charge of the country are sometimes known as the “Tsinghua Clique”. This isn’t just some random bunch of guys going off the reservation.
In Asia, memory and semiconductor technology is viewed as a key national asset. Try persuading the Koreans that the Chinese should take a stake in Samsung, or Hynix and see how far you get. Don’t even bother asking the Taiwanese and TSMC. US technology markets, supposedly open and non-protectionist, must have looked to the guys at Tsinghua a much better bet, and not so long ago Intel made some deals with Tsinghua-linked companies which could involve some technology transfer, Qualcomm too. Now hearts have hardened I don’t think there’s going to be much more of that in the future.
From the Chinese perspective, US actions have to look pretty sinister. Building nationally significant industries is a perfectly legitimate goal for a developing economy. In semiconductors, moreover, China imports probably around 50% of the chips built in the world, but makes less than 5%. US companies are allowed to take stakes in Taiwanese chipmakers, Europeans can buy US semi guys, and vice versa. I’m in no doubt the Chinese worry that their fighter jets might suddenly stop working too. In fact I’d reckon it’s more probable that the Chinese ones would rather than the Americans’ if there was ever a war.
The sanctions against ZTE and their suppliers must look fishy too. It’s not like the US should be shocked that ZTE was secretly making base stations for Sudan, Cuba and Iran, given that they all have working cellular networks and no indigenous technology. Whose base stations did the US officials roaming on 3G in Tehran during the nuclear negotiations think they were using? “Why now” must be a big question Beijing is asking. Is it to do with The Donald and the anti China rhetoric? An increase in complaints about dumping of e.g. steel? Or as the US would have it, a coincidence, the result of a “4-year long intensive investigation”? Maybe someone has an idea. Baruch doesn’t, but he reckons the innocent explanation is the least likely the Chinese are likely to settle on.
So OK; we know for sure now that Sandisk, Micron, and the other US semiconductor guys don’t have an underlying Chinese bid anymore. But the real thing to look for is the response still to come from Beijing. Both Apple and Cisco have been hurt in the past by China in what looked like retaliation for past US trade and technology sharing misdeeds. Maybe they’ll be the targets again, maybe someone else with big sales in China (Intel?). Another open question is whether the Chinese will give up trying to buy, and build instead — their own memory fabs. That $20 billion will build one or two decent sized ones, enough to properly mess up the delicate state of global demand and supply in DRAMs and NANDs. Word is they used some fat salaries to hire the great Nakamoto-san, ex head of the Japanese failed DRAM giant Elpida, and some guys from Taiwan, to do it. With an open cheque from the government, maybe they’ll have enough time to learn by doing. I’m not sure the other memory makers have the time or money to sit by and watch, however.
*There’s no shame in this, by the way, it’s how every developed economy got started; “made in Japan” was a term of derision in the 1970s and early 80s. Now it’s a sign of quality: Baruch owns a Subaru.
** Baruch’s theory is that you can never underestimate the impact of cheap airport fiction on US foreign policy. I think a lot of the thinking of the last administration came from Tom Clancy novels.
Ultimi Barbarorum 